With Generative AI taking over the headlines of late, I thought I would try to use its powers for good and ask a couple of questions that might help us answer some burning (?) questions around the areas of insolvency and corporate recovery.
Firstly, I asked Chat GPT what was the Top 5 Things People want to know about insolvency in Australia… and it gave me a list. Here is a countdown of each item, from 5 to 1 together with my brief commentary as to each…
Number 5:
According to Chat GPT, Number 5 on the list is:
How can I avoid insolvency in Australia? People want to understand the steps they can take to avoid becoming insolvent, such as managing their finances effectively, seeking professional advice early, and exploring options for debt consolidation and restructuring.
AFR Says:
Well, that’s pretty much it, isn’t it? In my opinion, it is vital for business owners to be across the financial position, of their businesses, constantly. Of course, the bookkeeping and accounting functions may be outsourced but it doesn’t mean we outsource the accountability. Speaking with your trusted advisor often to reflect on what has been happening in your business and also planning for the future is a must. Heads do not belong in the sand. This together with keeping and being on top of your record keeping and lodgements, and seeking advice and assistance as soon as something doesn’t seem right are all good strategies for avoiding insolvency.
Number 4:
According to Chat GPT, Number 4 on the list is:
What are the options for dealing with insolvency in Australia? People want to know about the options available to them when they are facing insolvency, such as debt agreements, personal insolvency agreements, and informal arrangements.
AFR Says:
There are a number of options available for dealing with insolvency in Australia, and as per the outline in #5 above, the earlier you seek assistance and advice in relation insolvency-related matters, the more options are available.
The main options in relation to a company that is, or about to become, insolvent include Safe Harbour, Small Business Restructuring, Voluntary Administrations, Deeds of Company Arrangement, and Liquidation.
With respect to personal insolvency, individuals can consider Bankruptcy, Personal Insolvency Agreements, and Debt arrangements.
You can find out more about these various options at https://www.smbadvisory.com.au/our-services
Number 3:
According to Chat GPT, Number 3 on the list is:
What are the consequences of insolvency in Australia? People want to know what happens to a person or a company when they become insolvent, including the impact on their assets, liabilities, and ability to trade.
AFR Says:
There are a number of different consequences and they can differ depending on the entity and the insolvency engagement involved.
For individuals who become bankrupt, in the main, there is a line drawn at the date of bankruptcy and (with certain exceptions) the assets owned by a person at that time and the debts owed by the person at that time are now quarantined in the bankrupt estate. This means that the trustee in bankruptcy has the right to realize the assets and property of a bankrupt, with a view to paying any available realizations to the creditors of the estate. Most creditors of an individual can no longer pursue that person, once they become bankrupt, instead, they deal with the trustee in bankruptcy.
Other points to note in relation to bankruptcy (but by no means an exhaustive list):-
Income assessments are undertaken each year and bankrupt persons may be required to pay a portion of their after-tax income (that exceeds certain thresholds) to their estate;
Bankrupts are entitled to retain a Motor Vehicle (for the primary purpose of transport) and tools of trade up to certain, adjusted values;
Overseas Travel can only be undertaken with the permission of the trustee in bankruptcy;
The period of bankruptcy usually lasts for 3 years from the filing of the Bankruptcy Form but can be extended out to 5 or 8 years as a result of non-compliance;
There are other relevant points, but watch this space (or feel free to reach out) for additional commentary in this area.
In relation to companies that are insolvent, it is important that directors do not continue to trade a company when it is unable to pay its debts as and when they fall due. If directors do trade a company whilst it is insolvent, they can become personally liable for any debts that are incurred, but which are unable to be repaid. When an insolvency practitioner is appointed as an Administrator or a Liquidator, they are then essentially in control of the company, and their primary duty is to the creditors that remain outstanding. Insolvency Practitioners are required to realize any assets of the company and investigate the affairs of the company in the lead-up to any insolvency, including reporting any non-compliance to ASIC, and also to assess any voidable transactions or other recoveries that may be in the interest of creditors.
Again this is not a comprehensive list, but a high-level outline of what is involved.
Number 2:
According to Chat GPT, Number 2 on the list is:
What are the different types of insolvency in Australia? People want to know about the different types of insolvency, such as voluntary administration, liquidation, and bankruptcy, and the processes involved in each.
AFR Says:
This does seem a little bit like a repeat and restate of Number 4… but hey it’s AI, so let’s go with it…
In terms of a formal insolvency appointment, we break these up into Corporate Insolvency (relating to companies), and Personal Insolvency (relating to individuals).
With respect to Corporate Insolvency, the different types of insolvency appointments are:-
Voluntary Administration (VA): This type of appointment is made by the company directors when they are aware that a company is insolvent or about to become insolvent. The appointment can also be made by a secured creditor that has a charge over the whole or substantially the whole of a company. A VA is an appointment that can be made if the directors or another interested party want to formally restructure a company through a Deed of Company Arrangement (DOCA). A Voluntary Administrator has to report to creditors on their opinion as to whether any proposed DOCA is likely to be better for creditors than if the company were to go into liquidation. The Administrator reports to creditors and convenes a “Decision” meeting wherein creditors resolve to accept any proposed DOCA, put the company into liquidation, or hand the company back to the directors.
Deed of Company Arrangement (DOCA): This type of appointment may follow from a VA appointment but cannot happen in isolation. A DOCA is an arrangement put forward by a director or an interested party (and accepted by resolution at a meeting of creditors) that allows for the company to continue (as opposed to being wound up) and provides for a return to creditors that should be better than the creditors might receive if the company were to go into liquidation. At the conclusion of the DOCA, should the deed be successfully completed, the company comes out of external administration to continue in its endeavors.
Small Business Restructuring (SBR): This is an insolvency appointment wherein the directors remain in control of the company whilst a Small Business Restructuring Practitioner assists with facilitating a restructure of the business through a Restructuring Plan.
Creditors Voluntary Liquidation (CVL): This type of appointment is made by a resolution of a company’s shareholders and provides for the winding up of the company, with the realization of assets, investigations into director conduct, and potential voidable transaction recoveries, payment of any available distributions to creditors, and the ultimate deregistration of the company.
Court Liquidation: A Court Liquidation works through the same process as a CVL, however, the initial appointment is made by the Court, usually on the application of a creditor, however, it may also be instigated by a shareholder, or other aggrieved party.
Receiver/Receiver & Manager: A Receiver can be appointed either under an instrument (ie pursuant to a Security Document) or by the Court. The Receiver is appointed for the purpose of realizing specified property for the benefit of the secured creditor that appointed them.
When we talk about Personal Insolvency, however, the alternatives are:-
Debt Agreement – This is an option available to debtors that meet certain criteria (ie: asset, income, and creditor threshold amounts), and allows for a debtor to provide an agreement to creditors to pay installments over time in compromised satisfaction of their outstanding debts.
Personal Insolvency Agreement (PIA): Similar to a DOCA, a PIA is a proposal that can be put up by a debtor through the Controlling Trustee Process, which, if creditors resolve to accept same, may offer a better return that could be achieved should the debtor be made bankrupt.
Bankruptcy: can either be commenced voluntarily through a debtor’s petition or by a creditor through a Court Application and Sequestration Order. A Trustee in Bankruptcy is appointed, at which time (with some exceptions) the assets of the company vest in them for realization, investigations are undertaken with respect to potential recoveries and the bankrupt’s examinable affairs. The Trustee undertakes an annual review of the bankrupt’s income to assess whether any amounts are to be paid to the bankrupt estate, and where possible, distributions are made to creditors. Bankruptcy usually lasts for 3 years but can be extended to 5 or 8 years with non-compliance or indefinitely, should a bankrupt not file their Bankruptcy Form.
As mentioned throughout this series, the earlier expert advice is sought the more options may be available in relation to specific situations.
Number 1 (drumroll please):
According to Chat GPT, Number 1 on the list is:
“What is insolvency in Australia? People want to understand the concept of insolvency in the context of Australian law. Insolvency refers to the situation where a person or a company is unable to pay their debts as and when they fall due.”
AFR Says:
Insolvency in Australia is generally split into two parts (as we have seen throughout this series). Corporate Insolvency deals with companies that are unable to pay their debts as and when they fall due (through the Corporations Act 2001 (Cth)) and Personal Insolvency which concerns individuals in financial distress (through the Bankruptcy Act 1966 (Cth)). There are a number of options available to assist people, businesses, and companies that are struggling fiscally, and as with everything, the sooner assistance is sought from an expert in the field (hello 👋 have we met?) and action is taken, the more alternatives for resolution may be available.
If you or your clients are suffering or anticipating financial distress, or you have additional queries regarding insolvency appointments, feel free to reach out to discuss options, outcomes, and solutions.
This article is intended to provide general information only in summary format on relevant issues. It does not constitute legal or financial advice, and should not be relied on as such.